SMEs

| |

SMEs in Laos

According to the Prime Minister’s Decree 42 on the “Promotion of Small and Medium Enterprises”, Small and Medium Enterprises (SMEs) are independent enterprises that are legally registered and operate according to the prevailing laws of the Lao PDR and are classified into the following size categories:

Small enterprises - those having an annual average number of employees not exceeding 19 persons or total assets not exceeding two hundred and fifty million kip or an annual turnover not exceeding four hundred million kip

Medium enterprises - those having an annual average number of employees not exceeding 99 persons or total assets not exceeding one billion two hundred kip or annual turnover not exceeding one billion kip

There are three types of SMEs: Product Production; Trade; and Services. According to the Steering Committee on Economic Census, 2006, there are 126,913 enterprises of which about 90 percent are SMEs.

SMEs have played an important role in socio-economic development in Lao PDR. In recognition of this, the government is developing a policy to promote SMEs and provide intending entrepreneurs access to finance and other facilities.

SME Case Study

Xaobangroup Company

Xaobangroup is categorized as a small enterprise and has operated its business since 2004. In 2010, the company has 15-18 employees (casual and full time) on which most are women.

Xaobangroup is a registered private company which is managed by a board of three directors. The company has five divisions: processing, packaging, delivery, marketing and administration.

The starting point of Xaobangroup as a Small Enterprise

Nongnut Foppes, Manager and Founder of Xaobangroup, found that in the late 1990s, the markets of Laos still lacked high quality yogurt with natural ingredients. Supplies of mass-produced yogurt were being brought in from factories in Thailand. Since Nongnut, who used to live in Holland was already making yogurt with natural ingredients for her family, she decided she would produce and sell yogurt before starting other natural products.

“I know what kinds of food products and taste foreigners like,” said Nongnut.

Another reason for her to make homemade yogurt was that she wanted to extend the life of milk. “Fresh milk goes bad in a few days unless you turn it into something else such as yogurt which can last for three weeks,” Nongnut explained.

Difficulties to start the business

The company experienced a lot of difficulties when it started the production and sale of products, especially yogurt, in the Lao market. This was mainly due to the scarcity of raw materials in Laos. The company had to do a lot of studies and research on investment cost and raw materials used in production for two years (2003-2004). The study was undertaken through an organic plantation experiment in Nabong Farm.

“We want to include all activities from farm to table in order to understand the processes and ensure that the food produced is safe and clean and also to really know about the investment budget,”

“Organic planting experiments such as passionfruit helps us to know the cost for planting and the cost per kilo. We don’t want to plant the fruit, we want to assess the initial investment budget and the possibilities,” said Nongnut.

In addition, the company had to look at different ways of packaging so that they could compare prices; they had to explore the best way for product delivery that was safe, quick and worthy; they also experimented with different kinds of production to ensure a satisfactory product standard.

The company invested a lot of money to conduct these studies.

Difficulties to operate/maintain the business

Xaobangroup has to import fresh milk from Thailand due to the limited supply of milk in Lao PDR. Consequently, they have to face expensive import tax because Xaobangroup is a small enterprise, which is not entitled to import products.

“We need at least 700-1000 liters per week, but Nabong Farm can only supply 30 liters per day to Lao markets at present, so we have to import fresh milk from Thailand,”

The company has to pay 1,200,000 Kip per week import tax at the Friendship Bridge Check Point and, over a one month period, needs to bring in four (4) shipments of goods.

With regard to packaging, Xaobangroup currently orders the containers from Thailand. However, the cost of coloured or ‘designer’ packaging is out of reach for Xaobangroup. “We have to order a large amount of cups (between 500,000 and one million cups) otherwise they will not make them for us. How can we get enough money to buy the cups? It would take us a year or three years to use them up?”

The Xaobangroup manager believes that a number of small enterprises have collapsed due to high cost of packaging. Nongnut, therefore, has suggested that small enterprises producing similar products ought to cooperate and use the same packaging.

Business Strategy

Xaobangroup’s marketing strategy is to sell natural products to today’s modern urban consumers who have a high income and are health conscious. The company’s main focus is to produce good quality, clean, fresh and safe products. The ultimate goal of Xaobangroup is to produce food for healthy living, provide local employment and steer away from anything related to factory-style production.

“Whatever we produce, our clients’ needs are taken into consideration. We imagine that we are one of the clients. We have to maintain good quality. We do not compete with products from neighboring countries because our clients have different needs. Our products are more expensive because they are of higher quality. Their products use milk powder, canned fruit and are produced in factories; but ours use fresh milk, fresh fruit and have no preservatives,”

The company promotes the products through ‘booth exhibitions’ in Vientiane rather than through other forms of advertising, which is more costly for them. “Instead of paying 200 USD for an advertisement, we choose to pay for a booth exhibition where our customers can try our products,” said Nongnut.

In an attempt to solve the packaging issue, the company will try to produce other homemade products so that the large number of packages ordered can be used up. The company will also introduce new products every year in order to increase their profit.

Nongnut believes Laos should have a dairy farm for the sustainability of Lao yogurt. The dairy farm would also help reduce the importation of fresh milk from overseas because 80 percent of yogurt is made from fresh milk.

(LNCCI does not aim to promote Xaobangroup’s products, but merely wishes to present the company as an SME case study operating in Laos).

For more information about Small and Medium Enterprises in Laos, please contact: Investment Promotion, Trade and SEMs Division